Egalitarian or Edwardian? The rising wealth inequality in Australia

Perceptions of the levels of both income and wealth inequality are derived from our day-to-day experiences.
AAP/Dean Lewins

Jennifer Chesters, University of Melbourne

Recent commentary on levels of inequality exposes the myth that Australia is an egalitarian society in which the privileges of birth have little currency.

Focusing on inequality in the distribution of incomes ignores an equally important dimension of inequality: wealth. Wealth is much more unequally distributed than income. Therefore, ignoring wealth inequality skews perceptions of social inequality.

Perceptions of the levels of income and wealth inequality are derived from our day-to-day experiences. This means that not mixing with people from the other end of the wealth distribution can colour our perceptions of inequality.

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Further reading: Here’s why it’s so hard to say whether inequality is going up or down

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The lack of official data on the wealth holdings of Australians hampers research into trends in wealth inequality. Between 1915 and 2003-04, there is almost no official wealth data to examine.

In 2003-04, the wealthiest 20% of Australian households held 58.6% of total household wealth, and the poorest 20% of households held just 1.4% of total household wealth. In 2013-14, the wealthiest 20% of households held 61% of total household wealth, and the poorest 20% of households held just 1% of total household wealth.

These figures indicate that wealth inequality increased over the decade to 2013-14.

The table below details trends over time in various measures of wealth inequality. The P90 to P10 ratio compares the wealth of households at the 90th percentile with that of households at the tenth percentile. A larger ratio indicates greater levels of inequality.

In 2003-04, households at the 90th percentile held 45 times as much wealth as households at the tenth percentile. In 2013-14, households at the 90th percentile of the distribution held 52 times as much wealth as households at the tenth percentile. This indicates that wealth inequality increased in that decade.

Using the mean and median household wealth figures, it is possible to calculate the ratio of median to mean wealth.

The closer this ratio is to one, the lower the level of inequality. In 2003-04, the ratio was 0.63. In 2013-14, it was 0.57. This also indicates that wealth inequality increased.

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The distribution of household wealth also varies between Australia’s state and territories, and by location within states and territories.

Households in the ACT recorded the highest mean household wealth (A$890,100). Households in Tasmania recorded the lowest mean household wealth ($595,600).

When these figures are disaggregated by location into capital city households and households located in the rest of the state, the largest wealth gap occurs in New South Wales. The mean wealth of households in Sydney was $971,700, whereas the mean wealth of households in the rest of NSW was $534,700.

The median-to-mean-wealth ratios show wealth was most unequally distributed in Brisbane and Perth.

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Given a relatively large proportion of household wealth is held in the form of property assets, the recently released Household, Income and Labour Dynamics in Australia Survey report identifies property as the key driver of increasing wealth inequality.

The percentage of 18-to-39-year-olds with property declined by 10.5 percentage points between 2002 and 2014. And the level of debt of those with a mortgage doubled in real terms.

So, fewer young adults have mortgages now compared to a decade ago, and those who do have mortgages have higher levels of debt.

Two other sources of publicly available data on wealth are the lists of the super-wealthy published annually by the Business Review Weekly in Australia and Forbes in the US.

Figures published in the Business Review Weekly show that, after adjusting for inflation, in 1984 the wealthiest 20 Australians held $8.25 billion in assets. In 2017, the wealthiest 20 Australians held $104 billion.

Forbes’ lists of billionaires (in $US) show that the number of billionaires living in Australia increased from two to 26 between 1987 and 2014.

Having an increasing number of billionaires would not be an issue if all Australians’ wealth was increasing at a similar rate. However, if the gap between the wealth of the billionaires and that of the average residents increases dramatically, there is likely to be discontent.

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Further reading: Don’t listen to the rich: inequality is bad for everyone

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Drawing on figures published in the Credit Suisse Wealth Report, it is possible to compare the wealth of the billionaires with that of average Australians.

In 2014, the wealth of the 26 Australian billionaires was equivalent to 214,914 adults with average wealth.

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Recent turmoil in the UK and the US may be an indicator that the “peasants are revolting” and are not willing to return to the 19th century, when the very rich lorded over the masses.

Australia has yet to experience mass demonstrations and voter backlashes. But events overseas should be ringing alarm bells among our politicians in Canberra.

Jennifer Chesters, Research Fellow, Youth Research Centre, University of Melbourne

This article was originally published on The Conversation. Read the original article.

Don’t listen to the rich: inequality is bad for everyone

Having only a few people with most of the wealth, motivates others. This theory is actually wrong according to research.
Aakkosia sosialistien lapsille (1912)/Flickr, CC BY-SA

Chris Doucouliagos, Deakin University

A world where a few people have most of the wealth motivates others who are poor to strive to earn more. And when they do, they’ll invest in businesses and other areas of the economy. That’s the argument for inequality. But it’s wrong.

Our study of 21 OECD countries over more than a 100 years shows income inequality actually restricts people from earning more, educating themselves and becoming entrepreneurs. That flows on to businesses who in turn invest less in things like plant and equipment.

Inequality makes it harder for economies to benefit from innovation. However, if people have access to credit or the money to move up, it can offset this effect.

We measured the impact of this by looking at the number of patents for new inventions and then also looking at the Gini coefficient and the income share of the top 10%. The Gini coefficient is a measure of the distribution of income or wealth within a nation.

How inequality reduces innovation

From 1870 to 1977, inequality measured by the Gini coefficient fell by about 40%. During this time people actually got more innovative and productivity increased, incomes also increased.

But inequality has increased in recent decades and it’s having the opposite effect.

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Author provided/The Conversation, CC BY-ND

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Inequality is preventing people with less income and wealth from reaching their potential in terms of education and invention. There’s also less entrepreneurship.

Inequality also means the market for new goods shrinks. One study shows that if incomes are more equal among people, people who are less well off, buy more. Having this larger market for new products, incentivises companies to create new things to sell.

If wealth is concentrated among only a small group of people, it actually increases demand for imported luxuries and handmade products. In contrast to this, distributed incomes means more mass produced goods are manufactured.

What’s been driving inequality since the 1980s is changes to economies – countries trading more with each other and advances in technology. As this happens old products and industries fade while new ones take their place.

These changes have delivered significant net benefits to society. Reducing trade and innovation will only make everyone poorer.

The declining number of people in unions has also contributed to inequality, as workers lose collective bargaining power and some rights. At the same time, unions can adversely affect innovation within firms.

Unions discourage innovation when they resist the adoption of new technology in the workplace. Also if innovation creates profits for firms but some of these are taken up by higher wages (lobbied for by unions), these reduced profits provide less incentive for firms to innovate.

Where workers’ jobs are protected, for example with union membership, there’s often less resistance to innovation and technological change.

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Author provided/The Conversation, CC BY-ND

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Giving people access to credit could change this

Most countries have much higher levels of inequality than the OECD average. This combination of high inequality and low financial development is a major obstacle to economic prosperity.

When financial markets work well, everyone gets access to the amount of credit they can afford and can invest as much as they need. We found that for a nation with a credit-to-GDP ratio of more than 108%, low income earners are less discouraged by not having a share of the wealth. There’s less of a dampening affect on innovation.

Unfortunately, most countries (including many in the OECD) are far from this threshold. In 2016, the credit-to-GDP ratio averaged 56% across all countries, and only 28% for the least developed. Until 2005, Australia was also below this threshold.

This means governments should look at providing more people with more access to credit, especially to the poor, to stimulate growth.

For financially developed nations like Australia, increased inequality actually has less of an effect on innovation and growth. So tackling inequality might not be as easy as increasing access to credit.

Spending and taxing are already historically high and growing inequality makes it harder to further raise taxes. Countries like Australia are not unequal societies in the sense of having significant barriers to people improving their income.

Australia is a relatively egalitarian nation. In 2016, the top 1% owned 22% of the wealth in Australia, compared to 42% in the USA, and 74% in Russia.

Governments in more developed nations can instead try to maintain a stable financial sector to improve growth or by training and education.

Chris Doucouliagos, Professor of Economics, Department of Economics, Deakin Business School and Alfred Deakin Institute for Citizenship and Globalisation, Deakin University

This article was originally published on The Conversation. Read the original article.

Bottom of the canal: Pfizer’s billion-dollar tax ploy

The Netherlands is where nearly $1 billion from Australia was sunk into two companies liquidated three years later.
Alex de Haas/flickr, CC BY-NC

Michael West, University of Sydney

Pharmaceutical giant Pfizer has engaged in a series of paper transactions to create a A$936 million loss in Australia. It is, for all intents and purposes, a billion-dollar exercise in tax avoidance.

Pfizer and its auditor KPMG, the “Big Four” global accounting firm, refused to comment on the transactions or to defend them when presented with questions by this columnist. Pfizer was contacted on numerous occasions and refused. Both parties refused to return emails and phone calls.

These are transactions housed within a byzantine corporate structure. We will outline, in brief, the series of transactions with Pfizer associates in the Netherlands which led to this “bottom of the canal” tax scheme, then provide the background to the company’s activities.

The sequence of transactions

2011: Pfizer Australia Investments Pty Ltd issues $728 million in shares to Pfizer companies in the Netherlands, the US and Luxembourg.

Pfizer Australia Investments (PAI) then uses the cash from this share issue to buy two subsidiaries incorporated in the Netherlands. These are called Pfizer Australia Investments B.V. and Pfizer Pacific Cooperatief U.A.

There is no record of these two companies in Pfizer’s global accounts before December 31 2010.

2014: PAI issues more shares and invests another $208 million in the two Dutch companies. This brings the total investment in these companies to $936 million.

By the end of 2014, the Dutch subsidiaries have been liquidated with zero return for PAI. The financial effect of this round-robin transaction is that share capital of $936 million has been created in Pfizer’s Australian entity and losses of $936 million are recorded in Australia.

Michael West/Rachell Li, Sydney Democracy Network

This ring-a-ring-a-rosy has all the hallmarks of a transaction designed to create almost a billion dollars in losses which can be used for tax purposes in Australia. The Australian company has “invested” almost a billion dollars into two overseas companies which were suddenly liquidated – with no value left for shareholders. Nothing is heard of them since.

It brings to mind the infamous Bottom of the Harbour tax schemes of the 1970s and ’80s where the financial engineers – aided by the top end of the accounting community – made investments in companies, stripped those companies of their assets and left nothing for the taxman.

In Pfizer’s case, almost $1 billion of cash was “invested” in two companies in the Netherlands which went belly up within three years. That left the Australian entity – indeed Australian taxpayers – carrying the can for its losses as the freshly created $1 billion in share capital is now sitting pretty for tax-effective distribution to Pfizer overseas.

A company with form

Pfizer has form on such transactions.

Back in 2011, another Pfizer entity, Pfizer Australia Holdings, created new share capital of $733 million after it bought two subsidiaries from Pfizer Inc. The two subsidiaries were acquired for hundreds of millions of dollars.

Pfizer issued shares, rather than paid cash, to buy these assets from themselves. So, new shares were created at a value of $733 million. This enormous price relied on a fancy asset valuation for the intangible assets held by these subsidiaries, notably “product development rights” of $461 million. These were the main assets acquired.

By 2014, share capital of $408 million of this new share capital had been returned in cash, repatriated to Pfizer companies overseas. And the product development rights had already evaporated (amortised) by $161 million.

Share capital created, assets written off, again. This is the Pfizer pattern. Share capital is created and its assets vanish.

On December 1 2014, yet another Pfizer entity here, Pfizer PFE Pty Ltd, acquired the Innovative Products Oncology and Consumer business from Pfizer Australia Holdings for nil consideration. This included the mysterious product development rights. Nil consideration. These are the rights valued three years earlier at $461 million.

Traditionally, when one company acquires a business from another company, one company is the buyer and the other company is the seller. This immutable principle of commerce does not necessarily pertain to Pfizer.

Pfizer Australia Holdings describes the transfer of this Innovative Products business as a “distribution”, a “transaction with owners in their capacity as owners”, according to its statutory financial statements.

In reality it is no such thing. Pfizer PFE is not an owner of Pfizer Australia Holdings. It holds no shares. It is merely a related party with a common ultimate parent in the US, Pfizer Inc.

Behind this narrative of a “distribution to owners” is tax. When you make profits of hundreds of millions of dollars, avoiding the 30% corporate income tax rate is big business.

Then and now

In 2007, Pfizer Australia Holdings was at the helm of Pfizer’s tax consolidated group in Australia and prepared “General Purpose” financial statements, full financial statements and full disclosures.

In 2008, it switched to preparing “Special Purpose” financial statements with far less disclosure, especially about income tax. KPMG’s 2008 audit report gave this special purpose report a clean bill of health even though required disclosures of changes in accounting policies were not made.

From 2009 to 2012, Pfizer Australia Holdings paid franked dividends to shareholders of $576 million; that is more than half-a-billion dollars going overseas. This is the good stuff, though, the above-board stuff, dividends paid out of profits already taxed in Australia.

After 2012, Pfizer ran out of Australian profits to distribute. It had hit the “patents cliff”. The blockbuster drugs Lipitor and Viagra were coming off patent and being challenged by generic competitors. Pfizer’s sales peaked at $2.2 billion in 2012. This used to be the biggest pharmaceutical company in the country.

Yet Pfizer had hit another cliff. The company was running out of Australian profits to distribute as dividends. It needed another way to rake the money offshore. And it came in the guise of return of share capital – better than dividends as there are far lighter tax obligations.

In 2014, a return of capital of $408 million was made offshore. And now, in 2016, Pfizer has made sure, through transactions with associates in the Netherlands, that there is another billion dollars ready to go offshore when the US overlords make the call.

Two things stand out, two takeaways from the “magic pudding” of Pfizer share capital creation and its bottom-of-the-canal tax scheme.

One, PAI’s audited financial statements claim that two Netherlands subsidiaries were incorporated in Australia. We can find no record of this.

Two, in 2014, PAI invested $208 million in the two Netherlands subsidiaries that were liquidated in the same year for no return. What is an observer to make of that?

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This column, co-published by The Conversation with michaelwest.com.au, is part of the Democracy Futures series, a joint global initiative between The Conversation and the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

Michael West, Adjunct Associate Professor, School of Social and Political Sciences, University of Sydney

This article was originally published on The Conversation. Read the original article.

Affordable housing shortfall leaves 1.3m households in need and rising – study

Around one in seven Australia households either cannot get into housing at market rates or are struggling to pay the rent.
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Steven Rowley, Curtin University and Chris Leishman, University of Adelaide

A new report by the Australian Housing and Urban Research Institute (AHURI) reveals, for the first time, the extent of housing need in Australia. An estimated 1.3 million households are in a state of housing need, whether unable to access market housing or in a position of rental stress. This figure is predicted to rise to 1.7 million by 2025.

To put it in perspective, 1.3 million is around 14% of Australian households. This national total includes 373,000 households in New South Wales, where the number is expected to increase by 80% to more than 670,000 by 2025 under the baseline economic assumptions of the modelling.

The first graph below shows the average annual level of housing need to 2025. The second, showing the percentages of households, permits a direct comparison by state. NSW and Queensland are in the worst position. The ACT is calculated to have the lowest proportional level of need.

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What does this mean for households in need?

Housing need is defined as:

… the aggregate of households unable to access market-provided housing or requiring some form of housing assistance in the private rental market to avoid a position of rental stress.

This includes potential households that are unable to form because their income is too low to afford to rent in the private rental market. These households would traditionally rely on public housing and community housing to meet their needs. However, more and more are being forced into the private rental market, paying housing costs they are unable to afford without making significant sacrifices.

To 2025, on average 190,000 potential households in NSW will be unable to access market housing in a given year. The graph below is the most revealing as it illustrates the gap between affordable housing demand and supply.

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The lack of social housing and subsidised rental housing prevents such households forming under affordable conditions. Many will manage to form but will have to spend well over 30% of their income on housing costs to do so, putting them in a position of financial stress.

The results also reveal the increasing pressure the affordable housing shortfall places on the housing assistance budget, notably Commonwealth Rent Assistance.

The absence of a significant new supply of affordable housing – there has been no large-scale program since the National Rental Affordability Scheme (NRAS) began in 2008 – has left state governments trying to find ways to plug the affordability gap.

Responses have been largely on the demand side, such as first home buyer concessions recently announced in NSW. But such incentives are no use for low-income households. To help them, intervention needs to be on the supply side.

How does Australia compare?

The AHURI research built on ideas emerging from research into housing need in the UK. It revealed interesting differences between the two countries.

UK government policy prior to 2010 emphasised the role of the planning system in helping to substantially increase affordable housing supply. This reflected evidence from England and Scotland that found a link between low levels of new housing supply and higher and rising house prices.

In this project, we found plenty of evidence of deteriorating housing affordability in Australia. But we did not find a particularly strong relationship between housing supply and price growth. This might reflect how other drivers of deteriorating housing affordability are more important in Australia – such as tax incentives for investors.

These findings suggest we need to look more closely at how new supply and investment demand interact, and in what circumstances boosting new supply is likely to improve affordability.

From our analysis of individuals’ labour market circumstances and incomes, it was also clear that the Australian workforce has not escaped the erosion of secure, full-time employment opportunities seen in other countries.

The combination of widespread insecure, part-time employment opportunities, high housing costs and low supply of rented social housing means the housing of many working Australians is extremely precarious.

How was the research done?

The research modelled housing need at the state and territory level to 2025 using an underlying set of economic assumptions and interrelated models on household formation, housing markets, labour markets and tenure choice.

The models were underpinned by data from the Housing, Income and Labour Dynamics in Australia (HILDA) Survey, the Australian Bureau of Statistics (ABS) and house price and rent data.

This research delivers, for the first time in Australia, a consistent and replicable methodology for assessing housing need. It can be used to inform resource allocation and simulate the impact of policy decisions on housing outcomes.

The intention is to further develop the model to assess housing need at the level of local government areas.

So, what are the policy implications?

The scale of the affordable housing shortfall requires major action from federal and state governments.

NRAS had its problems but at least delivered a supply of below-market housing. Australia cannot rely on the private sector to deliver housing for low-income households without some form of government subsidy as it is simply not profitable to do so.

The question is what government is going to be prepared, or even able, to spend big to close the affordable housing supply gap?

Steven Rowley, Director, Australian Housing and Urban Research Institute, Curtin Research Centre, Curtin University and Chris Leishman, Professor of Housing Economics, University of Adelaide

This article was originally published on The Conversation. Read the original article.

Security gets $1.2b, community programs to counter violent extremism $40m – that’s a foolish imbalance

Police raided several Sydney properties over the weekend in relation to possible terror plots.
AAP/Dean Lewins

Clarke Jones, Australian National University

The arrests and raids in Sydney over the weekend, as well as the 12 so-called “terrorist plots” disrupted by police since September 2014, ought to raise questions over whether Australia’s efforts to counter violent extremism are actually working.

A spending and policy imbalance

Australia has spent more than A$1.2 billion since 2015 on strengthening sharp-end counter-terrorism arrangements such as increasing intelligence and security capabilities. Millions more will be spent when the government’s proposed Department of Home Affairs opens.

Over roughly the same period, only about $40 million has been spent on countering violent extremism and community cohesion programs.

Of this $40 million, only around $2 million was given out in 2015 to 42 of the 97 applicants. This money was to support grassroots organisations to develop new, innovative services to move people away from violent extremism. This funding round was developed to improve Australia’s capability to deliver localised and tailored intervention services.

So, there is a significant imbalance between sharp-end funding and piecemeal, short-term, community-level grants. The money is clearly not being invested wisely or even reaching the right places, such as those at-risk communities willing to engage and desperately seeking funding. Many more terror-related arrests will follow in the foreseeable future as a result.

All the while, it’s been full steam ahead in relation to security, legislation, corrections, police and intelligence. This has come at the expense of community resilience and building up protective mechanisms within vulnerable youth and communities.

From my research with Muslim communities over the past two years, the government’s approach is verging on being counter-productive. It now risks trampling on the basic rights and freedoms of young Muslims, their families and their communities more broadly.

This approach will actually worsen the many underlying issues – such as discrimination, alienation, marginalisation and rejection – that seem to contribute to offending in the first place.

The safety of all Australians should remain a key government priority. And getting the balance right between security and youth and community welfare is difficult. But the government seems hell-bent on pre-crime arrest, prosecution and punishment, while falling short on providing the necessary long-term support for the young vulnerable people it really needs to protect and prevent from engaging in serious anti-social behaviour.

For those from minority communities in particular, the criminal justice system is a very slippery slope. Once in it, the prospects of positive and meaningful futures are slim.

Where Australia’s approach is lacking

As with the UK’s Prevent program, Australia’s approach suffers from multiple, mutually reinforcing structural flaws. Its foreseeable consequence is a serious risk to the wellbeing of young Muslims and Australian multiculturalism more broadly.

Much of the centrepiece of the government’s countering violent extremism strategy rests on the theory of radicalisation and the social engineering of radical views and cultures to become more conservative and “Australian”.

However, for the concept of radicalisation alone, there seems to be very little clarity about the term and the tools that measure it. If such tools are used to help determine the destiny of a young Muslim person, whether it be in a school or criminal justice situation, then these must be made more available for wider peer review – rather than held in secrecy within the government.

For those deemed “radicalised” or on the pathway to radicalisation, there are very few community-based secondary-level intervention programs designed to support them. Nor are there programs they are willing to participate in voluntarily. This is largely because most current programs are led by government and police, which seem to lack a crucial understanding about the many cultural, religious and ethnic nuances required for effective intervention.

Without close community partnerships and community-led approaches, programs will never be able to fully understand the highly complex nature of families and communities.

Getting access to vulnerable youth and their families, and then encouraging them to participate in interventions, requires close and trusted community partnerships. To date, partnerships between government and the more conservative community groups have not been fully developed. This is particularly the case with the more hard-to-reach groups, which have many of the young people requiring support or intervention.

Put together, this has limited the government’s capacity to support and fund communities working with the most at-risk or vulnerable youth.

The government’s position on these communities is that they are too risky to work with. In reality, it is too risky not to work with them.

To make us truly safe – not just from terrorism, but from other serious crimes too – the government needs to go back to basics. Australia should invest a lot more in longer-term community partnerships and develop more preventive measures, such as community-led interventions. These interventions must be developed by those outside the government’s national security apparatus.

A major government rethink is required if it is truly going to keep us safe.

Clarke Jones, Research Fellow, Research School of Psychology, Australian National University

This article was originally published on The Conversation. Read the original article.

Government calls for release of costings as Labor unveils trusts crackdown

Bill Shorten says Labor’s targeting of trusts is about delivering a level playing field in tax.
AAP/Sam Mooy

Michelle Grattan, University of Canberra

Labor has taken another step to put tax and fairness at the centre of its policy agenda by proposing a crackdown on discretionary trusts, which it claims would raise A$4.1 billion over the forward estimates and $17.2 billion over a decade.

A Labor government would apply a minimum 30% rate of tax on discretionary tax distributions to beneficiaries over 18 years old. According to the Parliamentary Budget Office, the change will affect 318,000 discretionary trusts.

The policy would not apply to farm, charitable and philanthropic trusts. Also unaffected would be non-discretionary special disability trusts, deceased estates trusts, fixed trusts, cash management unit trusts, fixed unit trusts, and listed and unlisted public unit trusts.

Announcing the crackdown, Opposition Leader Bill Shorten said it was about delivering a level playing field in tax, “so high-income earners can’t opt out of paying income tax”.

“Tradies and retail workers and mechanics and cleaners don’t get to choose how much tax they pay – and neither should anyone else,” he said.

With the government claiming the change would hit small business, Labor insists “small business will continue to enjoy asset protections”.

The trusts policy comes on top of Labor’s commitment to tighten negative gearing and capital gains tax concessions and to reimpose the deficit levy on high-income earners, among other measures.

The opposition has yet to announce what it will do about the already-legislated tax relief – being phased in – for businesses with turnovers of up to $50 million. It is expected a Labor government would want to retain that only for smaller businesses.

The ALP policy document points out that wealthy people are much more likely to have a trust than those with lesser incomes. The average amount in private trusts by the wealthiest 20% of households is more than $123,000, compared with $4,000 for the next quintile.

Discretionary trusts are used by individuals and businesses to reduce their tax by shifting income to those in a lower tax bracket. “This practice of ‘income splitting’ through discretionary trusts is used frequently by wealthy Australians to minimise their tax,” the policy says.

“Income splitting allows high-income Australians to avoid paying the marginal tax rate that should apply to their income level – something ordinary PAYG taxpayers can’t do,” it says.

The policy gives the example of a surgeon, “Sam”, with a non-working wife “Melissa”, and two non-working adult children. The surgeon earns $500,000 from his work income, and pays PAYG tax at the top marginal rate.

In the example, the couple has a discretionary trust which produces $54,000 from their investments. They attribute $18,000 each to the wife and children, who all pay no tax because their incomes are under the tax-free threshold. “This represents a tax saving of $14,460 had the investment income been attributed to just Sam and Melissa in equal proportions, and a tax saving of $25,380 had the investment income instead been part of Sam’s normal PAYG salary.”

The number of discretionary trusts has nearly doubled since the late 1990s to more than 642,000. The increase in non-discretionary trusts – without the same tax minimisation opportunities – has been much lower. In 2014-15, more than $590 billion of assets were in discretionary trusts.

13% of individuals in the lowest-income tax bracket receive distribution from a discretionary trust. This is much greater than for those on higher incomes.

“This indicates that a significant amount of income is being shifted from the wealthiest individuals to those earning little or no other incomes (for example, non-working members of the family such as spouses and young adults in full-time study) to reduce the amount of tax paid,” the policy says.

Labor says the proposed 30% rate “strikes the right balance between ensuring a fair amount of tax is paid on all trust distributions, while also aligning it with the rate for passive investment companies which also face a 30% rate of tax”.

Labor stresses the reforms “will not affect 98% of all individual taxpayers in Australia, with virtually all the revenue raised from people receiving trust distributions who have little or no other work income”.

Asked why farmers were being exempted, Shadow Treasurer Chris Bowen said they had “issues when it comes to lumpy income and various issues relating to agriculture”.

Michael Sukkar, the assistant minister to the treasurer, called for Shorten to release the full Parliamentary Budget Office costing, including the assumptions Labor had used to come up with the revenue being claimed.

“Australians know that Bill Shorten cannot be trusted. This also goes for his latest $17 billion tax-grab that will once again hit small business and their families,” Sukkar said.

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Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

There’s far more to the fair go than just economics

We need to consider whether values are the basis of beliefs about inequality.
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Eva Cox, University of Technology Sydney

Opposition Leader Bill Shorten has often argued that inequality in Australia is the worst it has been in 75 years.

Leaving aside whether that is or isn’t correct, there is a bigger, more pertinent political question: is it inequality itself, or the perception of inequality, that fuels so much of the contemporary mistrust of politicians and political systems?

The growing legitimacy of inequality is a serious problem, even among market advocates like the IMF and World Bank, which seek to confine the fix to more equitable distributions of wealth. They fail to recognise the strong possibility that the push on inequality comes from wider perceptions that the system is so unfair it creates distrust of those in power and their main alternatives, so the damage is social rather than material.

Commentator Ross Gittins has argued that the collapse of the “neoliberal consensus” is as apparent in Australia as it is in Donald Trump’s America and Brexit-ing Britain. Yet the data here do not reveal the serious poverty it brings with it.

The local focus on inequality has very much been more on tax rorts and the presumed sins of the rich than on the poor, either on or off welfare. This looks to be the basis of Shorten’s next policy bid for power, which he promises to release via inequality policies at the New South Wales ALP conference this weekend.

Shorten’s targeting of the voters’ desire for the “fair go” by claiming inequality in Australia creates a “sense of powerlessness that drives people away from the mainstream so creating a fault line in politics”.

His emphasis on the wider effects of inequality suggests he recognises it as a symptom of wider issues, rather than a single economic cause of problems. However, if his proposals are primarily focused on increasing tax takes, he is not tackling the wider damage, such as system distrust, that is widely evident.

He is not alone in this limitation; it dominated the debates on his proposals. The immediate responses from Treasurer Scott Morrison and several economic commentators disputed whether the Gini coefficient (a measure of how wealth is distributed in a society) supported the claims of rising inequalities. They ignored the many other indicators, such as that workers’ share of income is at its lowest level in a half-a-century.

The complex data shown in The Conversation’s factcheck come down mainly on Shorten’s side. These varied sources show the problem of defining what counts as inequality. Are voters very aware of income differentials? Or do most judge inequality by tightening budgets and everyday hardships such as rising utility bills?

It is in fact these perceptions of wider inequality as unfairness that affects how we relate to those in power. These are toxic effects that need to be fixed, not just through adjusting tax or individual payments.

There is considerable evidence that inequality is increasing and, importantly, that it is affecting the views of possible voters. The long-running Australian Election Study in 2016 found voters showed both increased distrust of politicians, and income concerns. More than half – 55% – supported incomes being redistributed versus 19% who did not. There have been other recent polls that show the lack of trust of the mainstream parties.

Who do you trust? Increasingly the answer seems to be: nobody.

After a year when voters worldwide thumbed their noses at mainstream politics and the elite, a landmark annual survey has found trust in major institutions is eroding at a rapid rate. And the effect is particularly pronounced in Australia.

The 2017 Trust Barometer by Edelman, the world’s largest PR outfit, has documented an “implosion of trust”. It found that Australians believe their entire political system is failing and they harbour deep fears of immigration, globalisation and changing values.

We need to consider whether values are the basis of beliefs about inequality. My thesaurus offers eight synonyms of the word: four simply describe it, while four signal negative feelings and perceptions: discrimination, unfairness, inequity, disproportion. None expresses inequality as a material or monetary difference. This indicates how often inequality connects with growing distrust of mainstream parties.

So is inequality a significant but limited indicator of wider issues that need attentions? The current special issue of Australian Quarterly features articles on this topic. The journal’s opening remarks state:

Inequality is arguably the catch-cry of our times, but, when you pick it apart, what does it actually look like in the Australian context? Is it economic, is it political; is it tax breaks for big business, or the everyday homelessness of our capital cities; is it the rot crumbling the sanctified pillar of the ‘fair go’, or has it become a convenient catch-all so broad as to be meaningless?

If this is so, the question will be whether Shorten’s policy options stay within the narrow confines of fairer taxes. If they do, it may be too simply economic to interest voters – unless he creates a broader vision of a trustworthy (fairer) Australia.

Eva Cox, Professorial Fellow, Jumbunna IHL, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

How history can challenge the narrative of blame for homelessness

While homelessness is becoming more visible, it is not new in affluent societies like Australia.
AAP/Joe Castro

Anne O’Brien, UNSW

Homelessness is a pressing humanitarian problem – one that is increasingly in the public eye. The evictions, protests, personal histories and statistical profiles of people experiencing it appear regularly in the media.

While some reports are negative, intent on portraying wasters or frauds, most seek to explain how people came to be homeless and show the experience as traumatising. Whatever their politics, almost all use the language of crisis.

But while homelessness is becoming more visible, it is not new in affluent societies like Australia. What is new is the copious evidence showing that it is possible to end – or at least radically reduce – homelessness. And taking the long view can reveal patterns that explain how and why people get caught up in conditions not of their making.

A lack of coherent policy

The concept of “housing first”, which has been in operation in Britain since the early 1990s and in the US since the early 2000s, shows that when people are provided with housing and support, they maintain tenancies.

Its premise is that housing is a human right. It also costs less. Research has found that people who were chronically homeless used A$13,000 less government services annually once they were housed.

So, if the problem is not lack of know-how, and if a more cost-effective option is available, why can’t we decide to end homelessness?

Some steps have been taken in Australia. In 2008 the Rudd government introduced a policy shift from managing to eradicating homelessness, promising to halve it by 2020 through a 55% increase in funding. But the Coalition cut funding in 2013.

While the 2017 federal budget increased funding by $375 million over three years, this is not enough to implement long-term strategies. The uncertainty of the budget cycle severely constrains what service providers can do.

This is a depressingly familiar scenario, but it is not set in stone. Activists and advocates achieved bipartisan support for the National Disability Insurance Scheme and, despite efforts to curtail it, it has survived. So why not bipartisan support for ending homelessness? For reviving and sustaining “housing first”?

But it’s hard to convince politicians that this is both good policy and won’t lose them the next election. And it’s even more difficult to assure voters that people experiencing homelessness are not getting it easy, when much of the tabloid media perpetuates a narrative of blame.

Why can’t we decide to end homelessness?
Homeless Persons Union of Victoria/Facebook

Challenging the narrative

A clear strategy is to challenge that narrative. A recently aired SBS program, Filthy Rich and Homeless, sought to do this by showing how hard it is to lift yourself up if you have nothing. Its interviews with people actually experiencing homelessness showed the brutal combination of circumstances that got them where they were.

Understanding homelessness in historical perspective also undermines the blame narrative. Knowing that homelessness increases as a result of devastating mega-events, such as war and depression, or at times when supplies of affordable housing and paid work diminish, challenges the waster/fraud idea.

Not all become homeless in these contexts. Historical records provide strong evidence that people from violent or luckless families are more liable, that macro and micro conditions intersect to precipitate homelessness.

Showing that homelessness has waxed and waned is a key to changing the narrative, just as fluctuations in employment refute the “dole bludger” label.

Few people applied for “the dole” during the post-war boom – but once the economy retracted in the early 1970s, applications increased. Not surprisingly, this was when the notion of the “dole bludger” took off.

It is difficult to get figures on homelessness in the past. But newspapers and reports from governments and NGOs give a sense of surges in homelessness at various times.

In the 1920s, when so many survivors of the first world war suffered physical or mental disability, reports of “diggers” sleeping in the Domain were common. By the late 1930s, care homes for “burnt-out diggers” were being built in the major cities, and some veterans were utilising the resources of the old city missions.

Civilian homelessness surged in the 1930s depression – and not just among itinerant men, but among the less-visible women and young people. Records of Sydney’s YWCA hostel show women escaping family violence or suffering mental illness, both of which were exacerbated by war and depression.

One of the first surveys of homeless youth in Australia, published by the Brotherhood of Saint Laurence in 1942, shows homelessness being produced systemically across generations. Most of the boys at their hostel had run away from home “because of cruel punishments or unhappiness” or had spent their childhoods in “care”.

So, if there is a crisis of homelessness, it has been going on in Australia for a long time. This should not be cause for despair. Instead, it is a call to deploy the big picture in the campaign to eradicate the narrative of blame.

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This piece was co-authored by Heather Holst, deputy CEO of community housing provider Launch Housing, who is the co-researcher on this project.

Anne O’Brien, Professor of History, UNSW

This article was originally published on The Conversation. Read the original article.

Counter-terrorism measures permanently reduce international trade: new study

Chris Doucouliagos, Deakin University and Cong S. Pham, Deakin University

Enhanced counter-terrorism measures help to protect lives, but unfortunately also reduce trade, our study shows. The costs of increased security measures are also not shared equally. While some costs are passed onto consumers, exporters and importers often bear the higher costs.

Since 2000, there have been more than 72,000 terrorist acts causing nearly 170,000 deaths. In our study we analysed the impact of terrorism on trade in over 160 countries from 1976 to 2014.

The effects of terrorism in one country spill over across national borders to reduce the trade of other nations. On average, each terrorist incident reduces trade by about US$6.4 million for each trading partner. The effect is also long lived; a terrorist attack can reduce trade over the next five years.

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How security measures change trade

One way counter-terrorism reduces trade is through time delays. Some security and counter-terrorism measures cause longer delays at airports, ports and borders and thereby increase the time it takes to trade.

Food products are particularly vulnerable to shipping delays and the disruption of supply chains that arise from tighter border controls. Trading delays can be very costly. One study shows trade is reduced by more than 1% for each additional day it’s delayed.

Counter-terrorism measures also increase charges and transport costs. Transport costs in particular are critical for trade.

Terrorism has led to higher security surcharges at ports and airports and higher insurance premiums. Requirements for businesses to report suspicious transactions cause delays, also increasing trading costs.

After the September 11 attacks in the US, many nations applied stricter counter-terrorism measures to combat money laundering and the financing of terrorism. These measures add to the cost of importing and exporting.

Some of the individual cost components may be relatively small. For example, anti-money-laundering compliance costs in Australia are pretty insignificant. Nonetheless, all these delays and charges add up.

As the OECD points out, doing nothing about terrorism is not an option. Preventive security measures are indispensable to secure trade, infrastructure and lives.

However, some counter-terrorism measures are effectively non-tariff barriers that do more to protect specific industries than to protect people. That is, some security measures have a similar effect to tariffs, in that they divert trade from lower cost overseas producers, to higher cost domestic producers.

And some measures are ineffective. For example, a key objective of counter-terrorism policies to control money-laundering is to choke off external funding for terrorists. However, some terrorist groups, most notably insurgents in Iraq and ISIS, are largely self-financed.

Our results also show that terrorism has a greater adverse effect on trade in sub-Saharan Africa in particular. This region is particularly vulnerable to terrorism due to governance problems such as corruption. Ironically, this region is especially in need of the benefits of trade to improve governance and institutions.

Our study also shows terrorism reduces trade by diverting government attention from trade liberalisation and reform. Promoting trade is an even more difficult task in an era of accelerated terrorism.

Trade itself can help counter terrorism

Trade spillover effects created by terrorism highlight the importance of co-ordinating counter-terrorism measures between countries. However, this also requires greater co-ordination between policies.

Trade can play an important role in curtailing terrorism by bringing nations closer and fuelling economic prosperity and development. Combined with other economic policies and strategies, greater co-ordination between security and trade policies can increase safeguards while lowering trade barriers. It can also offset the higher trade costs that result from extra security measures.

By reducing trade, counter-terrorism policies inadvertently drive a wedge between nations and make nations poorer. Making countries poorer in turn makes it harder to combat terrorism.

Chris Doucouliagos, Professor of Economics, Department of Economics, Deakin Business School and Alfred Deakin Institute for Citizenship and Globalisation, Deakin University and Cong S. Pham, Senior Lecturer in Economics, Deakin University

This article was originally published on The Conversation. Read the original article.

Taxing empty homes: a step towards affordable housing, but much more can be done

Vacant and unlit ‘ghost’ apartments are a source of public outrage in major cities around the world.
leniners/flickr, CC BY-NC

Hal Pawson, UNSW

Vacant housing rates are rising in our major cities. Across Australia on census night, 11.2% of housing was recorded as unoccupied – a total of 1,089,165 dwellings. With housing affordability stress also intensifying, the moment for a push on empty property taxes looks to have arrived.

The 2016 Census showed empty property numbers up by 19% in Melbourne and 15% in Sydney over the past five years alone. Considering that thousands of people sleep rough – almost 7,000 on census night in 2011, more than 400 per night in Sydney in 2017 – and that hundreds of thousands face overcrowded homes or unaffordable rents, these seem like cruel and immoral revelations.

Public awareness of unused homes has been growing in Australia and globally. In London, Vancouver and elsewhere – just as in Sydney and Melbourne – the night-time spectacle of dark spaces in newly built “luxury towers” has triggered outrage.

This has struck a chord with the public not only because of its connotations of obscene wealth inequality and waste, but also because of the contended link to foreign ownership.

Early movers on vacancy tax

Against this backdrop, the Victorian state government has felt sufficiently emboldened to legislate an empty homes tax. Federally, the shadow treasurer, Chris Bowen, recently backed a standard vacant dwelling tax across all the nation’s major cities.

Similar measures have come into force in Vancouver and Paris. And Ontario’s provincial government recently granted Toronto new powers to tax empty properties
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Both Vancouver (above) and Melbourne now have a 1% capital value charge on homes left vacant.
Tim Welbourn/flickr, CC BY-NC

Emulating Vancouver, Victoria’s tax is a 1% capital value charge on homes vacant for at least six months in a year. Curiously, though, it applies only in Melbourne’s inner and middle suburbs. And there are exceptions – if the property is a grossly under-used second home you pay only if you’re a foreigner.

Also, as in Vancouver, tax liability relies on self-reporting, which is seemingly a loophole. This might be less problematic if all owners were required to confirm their properties were occupied for at least six months of the past year. But that would be administratively cumbersome.

This highlights a broader “practicability challenge” for empty property taxes. For example, how do you define acceptable reasons for a property being empty?

In principle, such a tax should probably be limited to habitable dwellings. So, if you own a speculative vacancy, what do you do? Remove the kitchen sink to declare it unliveable?

How can we be sure a home is empty?

Lack of reliable data on empty homes is a major problem in Australia. Census figures are useful mainly because they indicate trends over time, but they substantially overstate the true number of long-term vacant habitable properties because they include temporarily empty dwellings (including second homes).

Using Victorian water records, Prosper Australia estimates about half of Melbourne’s census-recorded vacant properties are long-term “speculative vacancies”. That’s 82,000 homes.

Applying a similar “conversion factor” to Sydney’s census numbers would indicate around 68,000 speculative vacancies. Australia-wide, the Prosper Australia findings imply around 300,000 speculative vacancies – 3% of all housing. That’s equivalent to two years’ house building at current rates.

According to University of Queensland real estate economics expert Cameron Murray, a national tax that entirely eliminated this glut might moderate the price of housing by 1-2%. Therefore, although worthwhile, dealing with this element of our inefficient use of land and property would provide only a small easing of Australia’s broader affordability problem.

Making better use of a scarce resource

Taxing long-term empty properties is consistent with making more efficient use of our housing stock – a scarce resource. A big-picture implication is that tackling Australia’s housing stress shouldn’t be seen as purely about boosting new housing supply – as commonly portrayed by governments.

It should also be about making more efficient and equitable use of existing housing and housing-designated land.

Penalising empty dwellings is fine if it can be practicably achieved. That’s especially if the revenue is used to enhance the trivial amount of public funding going into building affordable rental housing in most of our states and territories.

But empty homes represent just a small element of our increasingly inefficient and wasteful use of housing and the increasingly unequal distribution of our national wealth.

One aspect of this is the under-utilisation of occupied housing. Australian Bureau of Statistics survey data show that, across Australia, more than a million homes (mainly owner-occupied) have three or more spare bedrooms. A comparison of the latest statistics (for 2013-14) with those for 2007-08 suggests this body of “grossly under-utilised” properties grew by more than 250,000 in the last six years.

Our tax system does nothing to discourage this increasingly wasteful use of housing. It’s arguably encouraged by the “tax on mobility” constituted by stamp duty and the exemption of the family home from the pension assets test.

A parallel issue is the speculative land banks owned by developers. The volume of development approvals far exceeds the amount of actual building. In the past year in Sydney, for example, 56,000 development approvals were granted – but only 38,000 homes were built.

In many cases, getting an approval is just part of land speculation. The owner then hoards the site until “market conditions are right” for on-selling as approved for development at a fat profit.

Properly addressing these issues calls for something much more ambitious than an empty property tax. The federal government should be encouraging all states and territories to follow the ACT’s lead by phasing in a broad-based land tax to replace stamp duty.

Such a tax will provide a stronger financial incentive to make effective use of land and property. The Grattan Institute estimates this switch would also “add up to A$9 billion annually to gross domestic product”. How much longer can we afford to ignore this obvious policy innovation?

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Acknowledgements: Thanks to Laurence Troy for statistics and Julie Street for background research.

Hal Pawson, Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW

This article was originally published on The Conversation. Read the original article.